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Side-by-Side Comparison of The Home Depot, Inc. (HD) and Lowe’s Companies, Inc. (LOW)

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Shares of The Home Depot, Inc. (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW), the two largest home improvement stores in the U.S., are trading near their respective 52-week high prices. With the stock market also trading near its 52-week high, the spring season a month or so away, and housing showing clear signs of improvement, it is worth taking a look at the common stocks of both companies. This article will discuss some of their valuation and fundamental measures, competitive positions, and prospects going forward.

The Home Depot, Inc. (NYSE:HD)Valuation and Fundamentals

Home Depot and Lowe’s, while similar companies, have different valuations and fundamentals. Home Depot has 1.5 billion shares for a market capitalization and enterprise value (EV) of $100.2 billion and $109 billion. Lowe’s has 1.1 billion shares outstanding and a market capitalization and EV of about $43.9 billion and $51.7 billion. As of Oct. 28, Home Depot had 2,250 stores with 274 stores located in Mexico and Canada compared to 1,750 stores for Lowe’s as of Nov. 2, of which 89% were company-owned. About 30 of Lowe’s store are located in Canada and four in Mexico (Lowe’s also has a 1/3 interest in an Australian joint venture with 23 stores). Below is a table that includes a number of valuation measures as well as fundamentals for Home Depot, Lowe’s, and the S&P 500 index.

HD LOW S&P 500
Dividend yield 1.7% 1.6% 2.2%
Price-to-earnings (2013) 19.3 18.8 12.6
EV/EBITDA (trailing) 11.9 9.7 n/a
PEG 1.5 1.1 1.9
EBITDA margin 12.3% 9.9% 20.2%
Sales per store (YTD) $8.1 million $6.9 million n/a
Inventory per store $4.9 million $5.1 million n/a
Service as % of sales 4.1% 6.0% n/a
Beta 0.9 1.1 1
Price-to-sales 1.4 0.9 1.4
Price-to-book 5.7 3.1 6.8
Average store size 128,000 sq feet 113,000 sq feet n/a

Source: Author’s calculations, SEC filings, Reuters; EBITDA – earnings before interest, tax, depreciation, and amortization; PEG – price-to-earnings-to-growth.

From the table above it seems like Home Depot shares are more expensive based on most valuation ratios. It also has a better EBITDA margin and a sales per store figure. However, Lowe’s derives a higher percentage of revenues from services, which offer higher value and indicate higher customer loyalty. Lowe’s common stock is also less expensive when accounting for its growth as signaled by its lower PEG ratio.

Competitive Position

Another possibility for the difference in valuation is that Home Depot seems to have a larger footprint and more initiatives. For example, Home Depot is usually in the news with initiatives to hire veterans and seasonal workers although both companies have similar initiatives. Due to Home Depot’s larger size it gets more media attention. This is in addition to internal improvements such as daycare for its employees in its Atlanta-based headquarters, offering customers and contractors the flexibility to obtain certain local permits directly from 12 stores in the Las Vegas area, and keeping a conservative balance sheet.

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